Ares Commercial Real Estate Corp (ACRE) 2013 Q4 法說會逐字稿

Welcome to Ares Commercial Real Estate Corporation's conference call to discuss the company's fourth-quarter and full-year 2013 earnings.

At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on March 17, 2014.

Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. The company's actual results could differ materially from those expressed in the forward-looking statements for any reasons, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. Please also note the past performance or market information is not a guarantee of future results.

During this conference call, the company may discuss core earnings, which is a non-GAAP financial measure as defined by SEC Regulation G. Core earnings is used because the company believes it provides useful information to investors regarding financial performance because it is an alternative method the company uses to measure financial conditions and results of operations. Core earnings should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For these purposes, the company defines core earnings as GAAP net income loss excluding non-cash equity, compensation expense, the incentive fee, depreciation and amortization related to target investments that are structured as debt to the extent that the company forecloses on any properties underlying such debt, any unrealized gains, losses or other non-cash items recorded in net income or loss for the period, regardless of whether such items are included in other comprehensive income or loss or in net income or loss. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges as determined by and approved by a majority of the independent directors of the company. A reconciliation of core earnings to net income or loss attributable to common shareholders to most directly comparable GAAP financial measures can be found in the company's earnings release issued earlier this morning and posted on the company's website at AresCRE.com.

The company has made available a fourth-quarter earnings slide presentation that can be accessed by going to the company's website at www.AresCRE.com and clicking on the Q4 2013 earnings presentation link on the homepage of the Investor Relations section of the website.

I will now turn the call over to John Bartling, Chairman of the Board for Ares Commercial Real Estate Corporation. Please go ahead.

Thank you operator. Good morning, everyone, and welcome to the ACRE Q4 earnings call. On the call with me today are my partners at Ares, our CEO and President of ACRE, Todd Schuster, Tae-Sik Yoon, our CFO, as well as Carl Drake and John Stilmar from Investor Relations.

As you may have seen in our release today, the board of directors has named Todd as the sole CEO and President of ACRE, a much deserved consolidation of roles. As many of you may also know, I oversee the day-to-day operations of Ares' growing $9 billion global real estate business. Consistent with my desire to remain active in the future growth of ACRE and Todd's desire for me to bring our cumulative real estate resources to the business, I have assumed the role of Chairman of the Board, replacing Mike Arougheti, who will stay on the Board as a Director. Rest assured Mike, along with Todd, Ares management and myself, are all fully committed to the success of the business today as much as we were when we went public in May of 2012. As Chairman of ACRE, I look forward to continuing to work with the Board, Todd, Mike, and in particular Todd as he seeks to build a best-in-class real estate finance company.

With this said, I will now turn the call over to my partner and our new President and CEO, Todd.

Thank you for the kind words. Much appreciated. I am extremely appreciative of the Board's confidence in me and as well as your dedication to the business and I look forward to growing this company together for the benefit of our shareholders.

This morning, we reported $3.3 million in net income, or $0.12 per share, in earnings to the fourth quarter. As Tae-Sik will discuss later on in the call, we are still ramping our earnings as we deploy and more efficiently use our available capital. We believe our principal lending business alone can generate $0.25 per share in quarterly earnings without the need for external capital.

As our mortgage banking business, ACRE Capital, benefits from our repositioning, we expect the current earnings drag to reverse and provide further upside to our GAAP earnings in the second half of the year. We will walk you through this in more detail in a minute.

Before we discuss our results in greater detail as well as the opportunity ahead of us, I would like to remind everyone of our goals and then spend a few minutes highlighting our 2013 accomplishments in our first full fiscal year as a public company. I will then follow up with a discussion of our growth strategy for the business.

We are well on our way to accomplishing our goal of building a top-tier commercial real estate finance business in the non-bank sector. ACRE is a direct originator that seeks attractive lending opportunities in the real estate markets where we see commercial banks and other legacy providers ceding market share through shifting regulatory standards and risk preferences. Adding to this market dynamic are rebounding transactional markets where real estate owners and sponsors are investing more actively in properties where there is a meaningful added value proposition. These trends are playing into the increased need for shorter-term acquisition financing of the type we provide.

Furthermore, our affiliation with Ares management enhances our ability to capture this market opportunity. With 140 investment professionals dedicated to US and European investing, along with other Ares managed businesses in the corporate space, we believe we enjoy informational and cross-selling advantages on several levels.

As a balance sheet lender, we view principal lending as our core business. We began 2013 with over $350 million in investments and ended the year with an excess of $1 billion. We believe our directly originated portfolio provides attractive risk-adjusted returns. In part, this high quality asset base was created by our record fourth quarter of $359 million in new commitments. For the year, we originated $875 million in aggregate commitments with 90% of these commitments structured as senior loans and 85% collateralized by multifamily or office properties. This mix reflects our continued focus on senior floating-rate loans and property types that we view to be generally more stable. Moreover, at year-end, over 90% of our investments were in senior floating-rate loans, which we believe positions our earnings stream to benefit from rising short-term interest rates.

In 2013, we also expanded our capital base, allowing us to originate larger loans and to be more relevant to our clients. More specifically, the average size of originated loans increased from $28 million in 2012 to $38 million in 2013.

We also added 13 new sponsor relationships while simultaneously deepening relationships with existing sponsors. Specifically in 2013, approximately 40% of our new commitments were extended to existing sponsors, up from approximately 15% in 2012. While the benefits from all of this increased origination activity have not been fully reflected in our fourth-quarter earnings, we met our goal of fully deploying the proceeds from our June equity offering by year-end.

In 2013, we also materially improved our access to more attractive debt capital by improving our credit facilities. As discussed last quarter, we also optimized our balance sheet by closing on our inaugural CMBS transaction, lowering our cost of financing and increasing the capital efficiency of our loan portfolio. The CMBS transaction is an example of the structuring capabilities that we apply across the platform to enhance portfolio returns. To that end, we announced on Friday that we closed on a strategically important funding facility with City National Bank. This $50 million facility allows us to efficiently access leverageable capital at a cost of LIBOR plus 300 basis points. We can now draw or repay leverageable capital as needed, allowing us to minimize the drag typically associated with raising future equity or equity-linked capital. We expect the use of this attractively priced capital, in conjunction with our bank line capacity, to add to our earnings we are currently working on a number of additional credit lines that should prove valuable as we continue to scale the business.

Let me now spend a few minutes on our future strategy and our outlook for 2014 and beyond. We want to build on the origination momentum that we have experienced, particularly in the second half of last year. Our plan is to enhance our origination capabilities with a view toward expanding into new property types and new geographies. To that end, Ares hired John Jardine in the fourth quarter of 2013 as the new head of Real Estate Debt Originations in the United States. We believe John's experience in building one of the largest real estate platforms in the country at TIAA-CREF over two decades will be instrumental in leading our real estate direct origination platform.

In the first quarter of 2014, Ares also hired an experienced senior banker to lead our European real estate debt business, further leveraging Ares management's extensive European real estate presence.

Turning now to ACRE Capital, our integrated mortgage banking platform, we continue to believe that it will provide us with enhancements in our product offerings and expand our origination breadth and deliver increasing returns over time. From a customer standpoint, we can now combine the power of mortgage banking and principal lending to offer one-stop solutions to clients seeking a higher level of proceeds for stabilized property, or for bridge to permanent executions for value-add assets.

In light of some of the volatility associated with the GSEs, we found this to be an ideal time to add selectively top producers that wanted to be associated with our principal lending business. We also see incremental opportunity in leveraging the backbone of ACRE Capital, its servicing operation. We expect to see future opportunistic revenue in working with Ares on third-party mandates as well as other strategic partnerships to provide servicing capabilities.

To prepare for the possibilities in front of us, we have added and will continue to add highly experienced mortgage bankers strategically while consolidating operations and upgraded our operational staff. We expect the economic benefits of these changes to be more apparent in the second half of this year. This upside opportunity is supported by the anticipated steady cash flow from the attractive MSRs on our balance sheet.

In summary, we are very pleased with the quality and performance potential of our principal lending business and the progress we are making at ACRE Capital. With that, I will now turn the call over to Tae-Sik to discuss our fourth-quarter and year-end results and the progress on the funding and capital management of our business.

Thank you Todd. Our fourth-quarter net income was $3.3 million, or $0.12 per common share, comprised of $2.9 million in net income from our principal lending business and $0.4 million from our mortgage banking business.

For the principal lending segment, we originated record loan commitments of $359 million during the fourth quarter comprised of six senior loans and two subordinated loans, which collectively resulted in $270 million of new fundings in the fourth quarter of 2013. This $270 million allowed us to end 2013 with over $1 billion of principal outstanding in our core principal lending business. As Todd discussed, these loan closings would have had a much greater positive impact on our fourth-quarter net income had they closed earlier in the quarter. In fact, approximately 95% of the $270 million in newly funded loans closed in the last 15 days of the quarter. Therefore, there was not a material earnings contribution from these loans in the fourth quarter. Had all of our new fourth-quarter loans and associated liabilities been outstanding on day one of the quarter, October 1, and all other results remain unchanged, net income would have been about $0.07 per share higher, resulting in $0.19 per common share on a pro forma basis for the fourth quarter of 2013.

For the mortgage banking business, we rate locked loans totaling $30 million of Fannie Mae DUS and HUD loans in the fourth quarter of 2013. We expect our origination activity and therefore our gains for mortgage banking activities to ramp up during the second half of 2014 as we have recently added production teams whose objectives are to focus on larger loan commitments in Fannie Mae, HUD, and if we are successful in obtaining a license, Freddie Mac loans as well.

As Todd discussed, we see synergistic opportunities when we combine ACRE Capital with our principal lending business. For example, even before closing on the acquisition of ACRE Capital, we worked together to originate and close a bridge loan that we held on the balance sheet for approximately one year earning attractive interest during this time. Simultaneously, ACRE Capital was pursuing a long-term permanent HUD loan for the same borrower. Approximately one year later, we successfully closed on the HUD loan for the borrower, generating additional fees, including premium on sale and retained the mortgage servicing rights. Here, by integrating ACRE Capital with our principal lending business, we converted what would otherwise have been a loan repayment into an additional source of revenue and attractive long-lived servicing assets while at the same time deepening the same relationship with our customer. This illustrates the integration of mortgage banking in our principal lending business yields a more powerful origination and earnings platform.

Turning to our balance sheet, as we previously discussed, we continue to believe that we are well positioned to benefit from a potential rise in interest rates. As of December 31, 2013, approximately 94% of the principal lending portfolio is comprised of floating-rate loans based on one month LIBOR. To match fund our assets, 93% of our liabilities, including all of the liabilities under our three funding agreements, our CMBS securitization and the new CNB line, are floating-rate also based on one month LIBOR. Given the match funded manner in which we finance our investment portfolio, we expect ROEs on our loans to benefit if LIBOR increases.

Our long-term focus of expanding our financing sources and improving capital efficiency continued in the fourth quarter and into 2014. As discussed, we closed a CMBS securitization in November 2013 which lowered the cost of borrowing, increased our initial advance rate, and overall more efficiently financed $494 million of our loans, thereby unlocking approximately $60 million of capital to fund further growth into 2014.

In addition, our new $50 million City National facility which Todd discussed earlier also illustrates our focus on capital efficiency. We believe the ease-of-use and the low cost of this leverageable facility should allow us to improve earnings in support of our dividend. We can now optimize our capital more efficiently by using this facility to fund the equity component of financing new senior loan originations. We also expect the CNB facility will allow us to significantly mitigate earnings drag when raising new equity capital in the future.

So far in the first quarter of 2014, we have closed approximately $80 million of new loan commitments, of which $69 million has been funded. We continue to work to close additional commitments by the end of the first quarter or the early part of the second quarter. After considering the funding commitments made so far in the first quarter and the cash and the undrawn capacity we have under our lines, including the availability of capital under our new CNB facility, we have the capacity to fund approximately $250 million of additional senior loan investments, again assuming a debt-to-equity ratio of approximately 2.5-to-1.

Turning to our dividends, we declared a first-quarter 2014 dividend of $0.25 per common share, consistent with our quarterly dividend level through 2013. As Todd stated, once we fully invest our remaining capital, we believe that we can generate $0.25 per share in net income from our principal lending business alone without the need to raise additional common capital, and prior to the net income impact of our mortgage banking business. In addition, we expect to further improve earnings coverage of our dividend throughout 2014 as we believe the earnings benefits from ACRE Capital will likely come into greater play in the second half of 2014.

I will now turn the call over to Todd for some additional and closing remarks.

Thanks Tae-Sik. Heading into 2014, we believe ACRE is well-positioned to capitalize in multiple ways on the growing market opportunity for non-bank real estate lending. In our principal lending business, we will leverage the infrastructure that we have built in 2013 to further expand our origination capabilities into new products and new markets. In our mortgage banking and servicing business, we are taking steps to increase the scale and profitability to capitalize on natural synergies in addition to other strategic opportunities, and we expect to see the benefits of these actions by the second half of the year. We remain very confident in the incremental ROE potential of this business and we couldn't be more pleased with the talent we have attracted within that platform.

Lastly, we have bolstered our leadership team of professionals across the platform, including adding two new independent directors to the board in Caroline Blakely and Bill Browning. Caroline was formerly a Vice President of Fannie Mae where she led several key strategic initiatives, including oversight and risk management of the 24 DUS lenders. Bill Browning was formerly the managing partner for Ernst & Young's Los Angeles office, which at the time of his departure was Ernst & Young's second-largest practice in the Americas and the largest public accounting firm in Los Angeles. We continue to attract the best and the brightest at all levels of the platform.

I would like to thank our shareholders for their support and our employees for their hard work and dedication. And with that, this concludes our prepared remarks. Operator, please open up lines for Q&A.

(Operator Instructions). Steve DeLaney, JMP Securities.

Thanks for taking my question. We really appreciate the segment data that you are providing, very helpful to understand the two distinct businesses. It looks like a new item at the end of December. You actually have a loan held for sale in the principal lending unit of about $85 million. Could you discuss that particular loan and what it really represents in terms of is it a one-off or is it a loan that was originated to sell to a conduit, or what? Thanks.

Sure. Good morning Steve, and thanks for your question. That is right. So the first time we had a loan available for sale in our principal lending business was in the fourth quarter. This was in connection with a relatively large loan that we originated, a $125 million large loan that we originated. Our intent is to keep the mezzanine loan, which is part of our loans held for investment, and the senior loan that we created we intend to sell.

As you recall, we have multiple strategies to finance our business using one of our three funding lines as one of those strategies, originating loans and simultaneously selling a senior and keeping the mezzanine as another part of our strategy. So this loan, we were able to close the loan very -- we were able to close with the borrower very quickly, and instead of rushing to the market to try to get a sale of the senior loan done immediately, we decided a better method for us was to retain the senior loan until we could most attractively sell that senior. So, we are actively pursuing that. We are actually working on towards achieving that objective right now, and so that is why you see the senior loan available for sale at the end of 2013.

That's helpful. So instead of structuring an A note, B note, you actually did a separate first mortgage and then you made the best loan for the piece you wanted to retain. Now you've just got to find a home for the first mortgage. Is that what we are hearing?

Exactly. We in essence manufacture our own subordinate loan and we are in the process of selling that senior loan right now.

I guess, by extension, if you sell that loan at a price above your cost basis, I guess what we would see some form of a gain in the principal lending segment when that loan is sold.

Technically, that's correct. We mark the loan to fair value as of year-end, which --

Oh, I see.

Tae-Sik-Yoon (multiple speakers) -- balance.

I see. Yes, you do have fair value there, yes. Okay, got it. Okay. And sticking with the segment theme, if we move down into the income statement for mortgage banking, we see an item, a fairly large item, $1.3 million, classified as other income. Could you just tell us what that is and the nature of that item, and is that recurring revenue or one-time revenue? Help us understand the $1.3 million. Thanks.

Sure. Yes, that is -- I would not say that's recurring revenue. In the fourth quarter, we were very fortunate that we had a loan that we were able to mitigate the loss on by buying a loan that would otherwise be subject to a loss sharing arrangement with Fannie Mae.

So one of the rights we have as a lender with Fannie Mae is if we don't agree with the appraisal upon which loan losses are determined, we actually have the right to buy a loan. And in this situation, we were able to buy the loan, and at the same time we were then able to subsequently sell that asset for a profit. And in this situation, we were able to achieve that recognition again. So this isn't I would say in the ordinary course of business, this is not something that we should expect to be recurring on a regular basis, but we were fortunately able to accomplish that in the fourth quarter.

Okay, very good. And then lastly in the same item, so mortgage banking was about breakeven before taxes. And I appreciate the comments you and Todd offered about sort of looking out to 2014 as sort of the first half of the year being a building up process and that our expectations for profitability should be more weighted to the second half of the year.

Looking at -- obviously the largest expense item is comp and benefits, the $3.7 million. Because you have been recruiting, and I know there's been some turnover as you're trying to upgrade originations, when we look at that particular number, should we consider if there are any one-time items there related to either recruiting bonuses, if you will, or possibly severance expenses relative to people who left?

Sure. Great question. The $3.7 million comp and benefit expense you see does include a number of items. It includes the normal recurring salaries of the employees of the mortgage banking business. It also includes the commissions that we paid on the newly originated loan activity we have for the quarter, as well as it does include some level of one-time recruiting expenses and some level of severance payments. I don't have an exact number to help break out sort of the recurring versus nonrecurring component of it, but you are right in that is inclusive of those four items.

Okay. Appreciate the color, and look forward to catching up a little later today on some more nitty-gritty things. Thanks gentlemen.

(Operator Instructions). Jade Rahmani, KBW.

Thanks for taking my question. Sorry, just to follow up to Steve's question on the comp and benefits, do you think that level of aggregate comp and benefits for ACRE -- Ares Capital is sustainable, the $3.7 million? I would think it should be in the $2.5 million range. Or I would've previously modeled that.

Sure. Again, I think the nice thing about the way the comp and benefits work is that the variable component is really tied to production. So in a quarter or in an annual period where you have high production, you're going to pay commissions to the originators based on that production. So, there is a good correlation between revenue and expense as far as the commissions are concerned. So, again, that $3.7 million does include the commission component of the new production volume, so I'm not sure if the model --

How much was that component, or what was the mix of variable versus fixed?

Yes, again, unfortunately I don't have the breakdown, the exact breakdown, of that $3.7 million. But again --

Okay. Maybe we can follow up later on that. Can you just more broadly talk about incremental yields in the core lending business by product type, and an update on how you view competition, whether it's picked up significantly in the most recent quarter as we've been hearing, and where you are finding incremental value by product or segment?

Todd Schuster. Thanks for the question. We are seeing a lot of different themes play out in the market. But essentially, from our perspective, we envision moving into some different geographies, some different products, over the course of the year.

We've already mentioned Europe in the call. We think there's a lot of opportunity in Europe. We just hired somebody to take advantage, help us take advantage of the opportunity over there. We have a pretty big presence over there that already exists. So we have plenty of boots on the ground and now we have somebody dedicated to the origination of loan production over there. So we think that's a place where there will be tremendous opportunity.

We also like the seniors housing space. We think that opportunity will start to become more relevant to us as the year plays out.

As a general matter, spreads have been relatively stable. Maybe they have come in a little bit. There's been some competition. It's important not to confuse the banks as competitors with what we do day-to-day. The banks tend to be in a completely different part of the capital stack than we are and are basically pursuing a different product, if you will. They price it differently. As I said, they're in a different part of the credit stack, so it's a different product that they are selling. And if anything, as bank spreads come in, that actually helps us on our cost of capital.

So the competition still exists. I don't think it's materially picked up since the beginning of the year. Spreads have been flat, maybe come in just a touch. I mean BBB minus spreads, which are to a proxy, what we think of as a proxy for real estate credit, have been basically flat to in 10 or so basis point since the beginning of the year.

I'll just add one thing, Jade. This is John Bartling. Let me give you more of a macro view. The thesis that we've created at ACRE Capital, which is really to play in that nonbanking bank space, we continue to see the thesis play through. And in fact, if you look not only in the US but overseas as well in Europe, we are finding more and more transactional volumes. The need to fill the gap between what the banks are providing and what owners and operators need to transact is increasing.

As we are looking at our pipelines, whether that's with ACRE Capital or in our equity business, that can tell you that the quality of the transaction flow is increasing. The sponsorship is increasing. We are seeing higher quality capital being raised. And the result of that is we really like the risk-adjusted returns in this market right now and the opportunities that are being presented to us.

The first quarter is always slow; it's just seasonally that way. And so as we go into the second and third quarter, we are watching what has been a long-term wait to see all of the mortgage balloons actually get out into the market and get refinanced. We are seeing more and more of that.

So we like the market. That's got a good environment around it. We like where we are from a thesis standpoint. Clearly, the banks will only play up to a certain attachment point in dollar size. We believe that we have a great opportunity to play there, one of which I think Steve DeLaney mentioned with that senior loan that we financed, and bringing together -- and it's my last part of the comment -- bringing together both Ares capability to syndicate loans with our vast network of banks, capital providers, and others to help us drive direct lending senior transactions much like that where we can syndicate the loan post-closing. It gives us a real differential advantage to the market, going to your competition question. There's not many competitors who can do that type of work. And then last but not least, when you look at the quality of sponsorship around some of those and the need for most banks to pour products where they do play, we really think we have an opportunity to really press in on that and it gives us a real advantage in the market.

Yes, and Jade, let me just add one thing to what John said. Just to be clear, we love this market right now for a couple of reasons. And just to put the final exclamation point on it, if you will. Transactional volumes are picking up and they are picking up as it specifically relates to assets where there are added value plays. And that is right in our wheelhouse.

Great. Thanks for that. So when I look at the table that gives your yield at quarter end, I assume you view those as sustainable.

Yes, I think --

There hasn't been much spread compression.

Yes, there has not been a lot of spread compression. I think spreads should stay sustainable. There could be some compression in the early part of the year. As the flow picks up, that compression could kind of stop, maybe reverse itself. It's hard to call it but I will say this, that if spreads do come in, we are also optimistic that spreads will come in on the right side of the balance sheet. And one thing we have proven is that we are pretty adept at taking advantage of the spread compression on the right side of the balance sheet.

Maybe just one clarification. There are couple of tables. I'm not exactly sure which table you are referring to. But again, if you look at the table that's in the 10-K that outlines all of the loans that we have in our principal lending business, I think what we are referring to is the most recent loans because there are obviously loans that we made more than 12 months ago. As we said, certainly versus 12 months ago, there has been spread compression. So if you take the weighted average of all of our loans, that might not be reflective of the current market, but certainly if you look at our most recent loans, that would be reflective of current market conditions.

Okay. That's helpful clarification. I wanted to ask your views on the conduit business not within the aligned Capital subsidiary, but just overall. I think although there's been margin compression there, the ROEs are favorable and it would seem potentially a good use of your in-place resources. So, I was wondering if you think you could use the Alliant Capital platform as a springboard to get something up and running on that quickly or it that's a business you are not interested in?

It's a business we could fairly easily get into if we wanted to. There's a lot of ways to attack that business. I would say, right now, our priority is building out our principal lending business and building out our mortgage banking business. And then as that plays out, we'll start to focus on additional products that we can offer through either ACRE Capital or in other ways.

It's one of the best -- the thesis of ACRE has always been to be a principal lender. The value of our mortgage banking business is to enhance ROE. And when you look at the different products that we bring in, it really provides the relevancy to the market that you hope for.

And you had asked a question about competition. We are one of the only balance sheet lenders with a take-out provider that has Fannie Mae and FHA. Certainly, there are some others that have CMBS. That is an element of product relevancy. It's something you can look at.

But the one thing I would always be concerned about is that people confuse what is our core business, and our core business is one of making direct loans to the borrower market, typically short-term where there is a business plan involved. And that market which is not efficiently covered by the banking industry where CMBS is efficiently covered by much of the banking industry, that market is our core business and the one that we look to scale and take advantage of over time.

Great, thank you very much.

Charles Nabhan, Wells Fargo.

Good morning guys. I appreciate the color on the outlook for the ACRE Capital business. When we think about the second half of the year, does that incorporate the Freddie license, the Freddie business up and running? And also, I realize the FHFA score card for 2014 isn't out yet, but there has been some speculation that the allocation could be roughly in line with what we saw last year. Could you also talk about your outlook, and maybe your expectations for the multi-family allocation this year?

As for the last question, I'm not sure I have a specific view as to whether the allocation -- I'm not sure I want to speculate on what the allocation for FHA would be. I think, whatever it is, I think there will be plenty of allocation for us to do a sizable amount of business in that product.

As it relates to ACRE Capital generically, here's how we think about ACRE Cap. We paid $61 million for a company that was worth $65 million. It has hard assets that throw off about $15 million per year in cash flow. And from our perspective, it makes a lot of sense to invest in that business, to drive the ROEs to accretive levels, which we think are going to sort of materialize in the second half of this year. So ACRE Cap, we are very -- I am very positive on ACRE Cap. I'm very positive on what we can do with that business, and I'm very positive about the buildout of it.

Okay. And as a follow-up, I understand you're obviously growing the business organically. But could you talk about your outlook for M&A, and if there's any avenues where -- any particular sectors that you find interesting that you could potentially add to the business?

Is that a question around ACRE Cap, or the business generally?

Just generally speaking.

Look. M&A is a non-predictable kind of opportunity, but I would say that the kinds of opportunities we are looking at right now are to build our business organically. If we are looking at acquisitions, we will probably be looking more at MSR kinds of opportunities as opposed to corporate opportunities. But I do think that our primary focus right now is on the buildout organically of our businesses.

Okay, great. Thank you very much.

We show no further questions at this time, so I will turn the conference back over to Todd Schuster for any closing remarks.

Thank you operator. I think that's it for the call. And thank you all for participating, and we look forward to talking to you all soon.

Ladies and gentlemen, this concludes our conference call for today.

If you missed any part of today's call, an archived replay of this conference will be available approximately one hour after the end of this call through March 31, 2014 to domestic callers by dialing 877-344-7529, and to international callers by dialing 1-412-317-0088. For all replays, please reference conference number 10039564. An archived replay will also be available on a webcast link located on the homepage of the Investor Relations section of our website.

Thank you for your time today. You may now disconnect.